At the request of the Banking Association of Turkey, Arthur Anderson recently prepared a survey examining the future of the Turkish Banking Sector in the new millenium.

As highlighted above the results of the survey show that Banks are expected to react in parallel to the political climate. Whilst the survey showed that the sector hold positive expectations in relation to the lowering of inflation, this is dependant upon political stability. Political stability being the key in enabling banks to formulate long term strategies. Further Government regulation is expected affording greater protection to depositors and investors, in addition to further standardisation and transparency in the application of accounting standards and principles.

Market expectations point towards an increased trend in retail banking but corporate banking is expected to slow as demand for commercial loans are likely to be replaced in part through finance raised on the capital markets. The sector also envisages a decrease in full-service banks; who serve a variety of markets and offer diverse products and services, predicting that certain banks will restructure and develop as specialist or “niche” banks focusing on specific markets and/or products.

INHERENT PROBLEMS

Commentators sceptical about recent developments; (statistically the sector as a whole has failed to perform, in June 1999 only 15 of the 80 banks operating in Turkey reported profits above inflation) cite 3 major areas for the lack of balanced growth in the sector and the economy as a whole: 1) competition is distorted on account of the Government banks, (who hold 40% of deposits), offering high interest rates so as to encourage deposits in order to minimise the costs of huge losses incurred by the granting of subsidies, 2) high interest rates driven by the Government’s borrowing requirements pushed banks to invest in high yielding treasury bills, whilst minimising loans to the real sector and 3) political interference preventing effective supervision.(For example the 100 % insurance of deposits is said to bring about irresponsible behaviour by some smaller banks).The sector’s growth was further hampered by the economic recession which consequently brought about an increase in non- performing loans.

CORRECTIVE ACTION

As of January the new banking act is in force. In short the purpose of the new Banks Act. No: 4389 (as amended by law No:4491) is to supervise and govern incorporation, management, transfer, merger, liquidation and supervision of banks in order to protect the rights and interests of depositors. Supervision and regulation will apply to any branch of any bank in Turkey, whether incorporated or to be incorporated in Turkey and extends to branches incorporated in other jurisdictions. The Act provides for a new independent Banking and Regulation Supervisory Board, who are empowered to take measures so as to maintain safe banking practices whose scope of responsibility is akin to the German Federal Supervision. It is hoped that the Act will de-politicise current supervision and clarify remedial measures.

In addition to the legislative measures imposed by the IMF stabilisation programme inflation has now been targeted at 25% for 2000 and as mentioned the rate of exchange against the dollar has been fixed for the next year, blocking out any rush on foreign currency. Interest rates and bond yields have therefore plummeted and investors no longer guaranteed of profitable interest gains have already begun to invest in mutual funds and the stock market. It is hoped that as inflation declines interest rates will continue to fall, the debt ratios will improve accordingly and bring about the necessary consolidation.such development being further fuelled by liberal economic policy, minimalist state control and increased industrialisation.

As part of the disinflationary programme the Government have set out plans for restructuring loss-making state banks and the smaller private sector banks. It is envisaged that many of the latter having become over- reliant upon treasury bonds will either have to merge or be made subject to temporary Government supervision and monitoring. This is particularly true in light of the Government’s plans to reduce the scope of the deposit scheme, if these “problem” banks are not cured of their difficulties it is feared that the situation will worsen as depositors may switch their deposits to bigger institutions. The Government seized control over five such banks in December 1999, amid claims that this would be the last operation of its kind. The deposit insurance fund is said to be sufficient to restore the banks to health and it is believed that these banks will be privatised or sold at the first opportunity. Privatisation is also on the cards for several of the state owned banks, within Turkey’s letter of intent to the IMF, plans are clearly outlined for the privatisation of Halkbank and Ziraat Bank, the two largest state-owned banks, which provide subsidised credits to small enterprises and the farming community. The Government are also under pressure to sell Emlak Bank and Vakif Bank, the smaller of the two main state banks.

On 14th February 2000, the Government announced that the eight banks seized by the Savings and Deposit Insurance Fund were to be sold one by one and that there is no question that these banks will be entitled to merge.

THE IMF STAFF MONITORING PROGRAMME

The legacy of past economic policy could not be overturned by endeavours made at short term measures and thus the republic’s high inflation, public sector borrowing and trade and balance of payments deficits were not corrected. Increased borrowing requirements eventually led the Government to request a new loan from the IMF, who in granting future funds set out a time table aimed at bringing about stability, primarily through the reduction of inflation. In 1998 it was agreed that a staff monitoring programme be implemented, this programme specifically targeted inflation and the balance of payments deficit, calling for inter alia: a) the narrowing and strengthening of public finances, b) stepped up privatisation so as to improve economic efficiency and lower the domestic borrowing requirement, c) the lowering of public sector wages and gradual phasing out of agricultural subsidies in order to meet targeted inflation. d) the daily fixing of the rate of exchange for the period of one year so as to increase the rate of depreciation to 20 percent in order to meet disinflation targets. One significant outcome of the agreement concerned the limitation over forward foreign currency transactions, many banks having struggled to close their positions only to be later hit by further regulations imposing increases in withholding and capital gains tax over financial instruments.

From the above potted history, it is hoped that a reader can thus appreciate that the moulding of the Turkish banking sector was heavily influenced by the ongoing complexities and set backs which occurred as a result of the economic climate. Objectively speaking the sector has performed at reasonable levels given the circumstances. Indeed many reputable Turkish banks have been able to sustain growth and stability despite the effects of economic and political hardship, therefore in questioning whether or commentators are overly pessimistic, one could be forgiven for thinking that perhaps good news just fails to make headlines.

FURTHER LEGISLATION

The establishment of a bank with foreign capital is both subject to banking law and foreign investment legislation.